What You Must Know About the Tax Return Deadline

March 31, 2024 — Sam H. Fawaz

It’s that time of year, folks, and I wish I were talking about spring. The federal income tax filing deadline for individuals is fast approaching—generally Monday, April 15, 2024. For taxpayers living in Maine or Massachusetts, you get a couple of extra days to procrastinate—your deadline is April 17, 2024.

The IRS has also postponed the deadline for certain disaster-area taxpayers to file federal income tax returns and make tax payments. The current list of eligible localities and other details for each disaster are always available on the IRS website’s Tax Relief in Disaster Situations page. Interest and penalties are suspended until the postponed deadline for affected taxpayers.

If I refer to the April 15 deadline in this article, you can assume I also mean any other postponed original deadline that applies to you.

Need More Time?

If you cannot file your federal income tax return by the April (or other) due date, you can file for an extension by the April 15 due date using IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Most software packages can electronically file this form for you and, if necessary, remit a payment.

Filing this extension gives you until October 15, 2024, to file your federal income tax return. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your extension is denied and explain the reason(s). There are no allowable extensions beyond October 15 unless extended by law, or you’re affected by a federally declared disaster area.

Assuming you owe a payment on April 15, you can file for an automatic extension electronically without filing Form 4868. Suppose you make an extension payment electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) by April 15. In that case, no extension form has to be filed (see Pay What You Owe below for more information).

An extension of time to file your 2023 calendar year income tax return also extends the time to file Form 709, “Gift and generation-skipping transfer (GST) tax returns” for 2023.

Special rules apply if you’re a U.S. citizen or resident living outside the country or serving in the military outside the country on the regular due date of your federal income tax return. If so, you’re allowed two extra months to file your return and pay any amount due without requesting an extension. Interest, currently at 8% (but not penalties), will still be charged on payments made after the regular due date without regard to the extended due date.

You can pay the tax and file your return or Form 4868 for additional filing time by June 17, 2024. If you request an extension because you were out of the country, check the box on line 8 of the form.

If you file for an extension, you can file your tax return any time before the extension expires. And there’s no need to attach a copy of Form 4868 to your filed income tax return.

Tip #1: By statute, certain federal elections must be made with a timely filed return or extension and cannot be made after the original due date has passed. For example, if you’re a trader and want to elect trader tax status for the current tax year (2024), it must be made by April 15, 2024, with your timely filed return or attached to your extension. Once April 15 has passed, you are barred from making the election until the following tax year. Some elections may be permanently barred after the regular due date, so check with your tax advisor to see if you need a timely filed election with your return or extension.

Tip #2: For proof of a timely snail-mailed extension, especially for those with a relatively large payment, be sure to mail it by certified mail, return receipt requested (always request proof of delivery regardless of the method of transportation.)

Caveat: Generally, the IRS has three years from the original due date of your return to examine it and assess additional taxes (six years if fraud is suspected). If you extend your return, the three (or six) year “clock” does not start ticking until you file it, so essentially, by extending your return, you are extending the statute of limitations. But contrary to popular belief, requesting an extension does NOT increase your odds of an examination.

Pay What You Owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if possible. If you cannot pay what you owe, file the return (or extension) and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time. You may be able to work with the IRS to pay the unpaid balance via an installment payment agreement (interest applies.)

It’s important to understand that filing for an automatic extension to file your return does not provide additional time to pay your taxes. When you file for an extension, you must estimate the amount of tax you will owe; you should pay this amount (or as much as you can) by the April 15 (or other) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension, potentially causing you to owe failure to file penalties and late payment penalties as well.

There are several alternative ways to pay your taxes besides via check. You can pay online directly from your bank account using Direct Pay or EFTPS, a digital wallet such as Click to Pay, PayPal, Venmo, or cash using a debit or credit card (additional processing fees may apply). You can also pay by phone using the EFTPS or debit or credit card. For more information, go to Make a Payment.

Tax Refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if 1) the return is filed electronically, 2) the tax refund is delivered via direct deposit, and 3) there are no issues with the tax return. To help minimize delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

To check on your federal income tax refund status, wait five business days after electronic filing and go to the IRS page: Where’s My Refund? Your state may provide a similar page to look up state refund status.

State and Local Income Tax Returns

Most states and localities have the same April 15 deadline and will conform with postponed federal deadlines due to federally declared disasters or legal holidays. Accordingly, most states and localities will accept your federal extension automatically (to extend your state return) without filing any state extension forms, assuming you don’t owe a balance on the regular due date. Otherwise, your state or locality may have its own extension form you can use to send in with your payment. Most states also now accept electronic payments online instead of a filed extension form with payment. Never assume that a federal extension will extend your state return; some do not. Always check to be sure.

Tip: If you want to cover all your bases, if your federal extension is lost or invalidated for any reason, you may want to file a state paper or online extension to extend the return correctly. It rarely happens, but sometimes, it is better to be safe than sorry.

IRA Contributions

Contributions to an individual retirement account (IRA) for 2023 can be made up to the April 15 due date for filing the 2023 federal income tax return (this deadline cannot be extended except by statute). However, certain disaster-area taxpayers granted relief may have additional time to contribute.

If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

Even if your traditional IRA contribution is not deductible, and you are ineligible for a Roth IRA contribution (because of income limitations), the investment income generated by the contribution becomes tax-deferred, possibly for years, and the contribution builds cost basis in your IRA, making future distributions a little less taxing.

If you make a nondeductible contribution to a traditional IRA and shortly after that convert that contribution to a Roth IRA, you can get around the income limitation of making Roth contributions. This is sometimes called a backdoor Roth IRA. Remember, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. If your traditional IRA balance before the non-deductible contribution is zero, then you’ll owe no tax on the conversion, and voila! You have just made a legal Roth IRA contribution.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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More Proof that Higher Contributions Are Most Important to Retirement Plan Success

March 22, 2015 — Sam H. Fawaz

A study by the Putnam Institute, “Defined Contribution Plans: Missing the forest for the trees?” contends that while a number of variables, such as fund selection, asset allocation, portfolio re-balancing, and deferral (contribution) rates all contribute to a defined contribution plan’s effectiveness — or lack thereof — it is deferral rates that should be placed near the top of the hierarchy when considering ways to boost retirement saving success.1

As part of its analysis, the research team created a hypothetical scenario in which an individual’s contribution rate increased from 3% of income to 4%, 6%, and 8%. After 29 years, the final balance jumped from $138,000, to $181,000, $272,000, and $334,000, respectively.

Even with a just a 1% increase — to a 4% deferral rate — the participant’s final accumulation would have been 30% greater than it would have been using a fund selection strategy defined as the “Crystal Ball” strategy, in which the plan sponsor uses a predefined formula to predict which funds may potentially perform well for the next three-year period. Further, the 1% boost in income deferral would have had a wealth accumulation effect nearly 100% larger than a growth asset allocation strategy, and 2,000% greater than rebalancing. Of course these results are hypothetical and past performance does not guarantee future results.

One key takeaway of the study was for plan sponsors to find ways to communicate the benefits of higher deferral rates to employees, and to help them find ways to do so.

Retirement Savings Tips

The Employee Benefit Research Institute reported in 2014 that 44% of American workers have tried to figure out how much money they will need to accumulate for retirement, and one-third admit they are not doing a good job in their financial planning for retirement.2 Are you? If so, these strategies may help you to better identify and pursue your retirement savings goals:

Double-check your assumptions. When do you plan to retire? How much money will you need each year? Where and when do you plan to get your retirement income? Are your investment expectations in line with the performance potential of the investments you own?

Use a proper “calculator.” The best way to calculate your goal is by using one of the many interactive worksheets now available free of charge online and in print. Each type features questions about your financial situation as well as blank spaces for you to provide answers. But remember, your ultimate goal is to save as much money as possible for retirement regardless of what any calculator might suggest.

Contribute more. At the very least, try to contribute enough to receive the full amount of any employer’s matching contribution. It’s also a good idea to increase contributions annually, such as after a pay raise.

Retirement will likely be one of the biggest expenses in your life, so it’s important to maintain an accurate cost estimate and financial plan. Make it a priority to calculate your savings goal at least once a year.

If you would like to review your current deferral rate(s) or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

1Putnam Institute, Defined Contribution Plans: Missing the forest for the trees?, May 2014.

2Ruth Helman, Nevin Adams, Craig Copeland, and Jack VanDerhei. “The 2014 Retirement Confidence Survey: Confidence Rebounds–for Those With Retirement Plans,” EBRI Issue Brief, no. 397, March 2014.

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Is myRA Your Next Retirement Plan?

February 16, 2014 — Sam H. Fawaz

Chances are, you’ve heard about the new myRA retirement savings program that was proposed by President Obama during his State of the Union speech.  But what is it, and how does it relate to the array of other retirement savings options you already have–including, of course, traditional and Roth IRAs, 401(k) or 403(b) plans?  Is this something you need to be looking at in addition to, or instead of one of these other options?
 
The new account, which is scheduled to be introduced later this year, will be offered to workers who currently don’t have access to any kind of retirement program through their employers.  Remarkably, this underserved population is actually about half of all workers, mostly those who work for small companies which have trouble affording the cost of creating and administering a 401(k) plan.  The idea is that a myRA would be so easy to install and implement (employers don’t have to administer the invested assets), and cost so little (virtually nothing), that all of these smaller companies would immediately give their employees this savings option.
 
Only some of the employees would be eligible, however.  Married couples earning more than $191,000, or singles earning more than $129,000, would be excluded from making myRA contributions.  And there is currently no law which says that employers would be required to offer these plans.
 
So the first thing to understand is that people who already have a retirement plan at work, or who earn more than the thresholds, shouldn’t give the myRA option a second thought.
 
Nor, frankly, would those people want to shift over to this option.  Why?  myRA functions much like a Roth IRA, which means that contributions are taxed before they go into the account just like the rest of a person’s salary, but the money will come out tax-free.
 
Anybody can make annual contributions to a Roth IRA; the 2014 maximum is $5,500 for persons under age 50; $6,500 if you’re 50 or older–and these are the same limits that will be imposed on the myRA.  BUT–and this is a big issue–the myRA is not really an investment account.  Any funds that are contributed to a myRA account earns interest from the federal government at the same rate that federal employees earn through the Thrift Savings Plan Government Securities Investment Fund–which is another way of saying that the money will be invested in government bonds.
 
Why does that matter?  Retirement accounts that invested solely in the stock market earned close to 30% from their stock investments last year.  The government bond investments that would have gone into a myRA earned 1.89% last year–which is below the inflation rate.  In real dollars, that was a losing investment.
 
Another big issue is the employer match.  Many workers who have a traditional 401(k) account get some of their contributions matched by their company, which effectively boosts their earnings.  myRA accounts will get no such match.
 
The Obama Administration clearly understands the difference between saving in a government bond account and actual investing.  Accordingly, there is a provision that whenever a myRA account reaches $15,000, it has to be rolled into a Roth IRA, where the money can be deployed in stocks, bonds or anywhere else the account holder chooses.  The program seems to be designed to encourage younger workers to start saving much earlier than they currently do.  Statistics show that the median retirement account for American workers age 25-32 is just $12,000, and 37% have less than $5,000. 
 
Will they be motivated to save when myRAs roll out at the end of the year?  Some commentators have noted that the money can be taken out of the account, for any reason, at any time, with no tax consequences.  That’s not a great formula for long-term savings.  But it does make the myRA account a convenient way for a worker just starting out to build up a cash reserve which could serve as a cushion against job loss or unexpected expenses like car repairs.  If it is not needed, the account could eventually grow into a retirement nest egg.
 
If you have any questions about the myRA or any other investment, retirement or financial planning matter, please don’t hesitate to ask.  We are a fee-only financial planning firm that always puts your interests first.

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Should College Freshman Start A Roth IRA?

September 3, 2009 — Sam H. Fawaz

At no time since the Great Depression have college students worried more about money.  Tuition continues to rise, financing sources continue to contract.  So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation.  Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates.  Assume that $20,000 grows at 7.5 percent a year until age 65.  That would mean more than a half-million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA.  First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible.  Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

To contribute to an IRA, you must have earned income; that is, income earned from a job or self-employment.  Even working in the family business is allowable if you get a form W-2 or 1099 for your earnings.  Contributions from savings, investment income or other sources is not allowed.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible.  Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: I’ll start by describing the difference between a traditional IRA and a Roth IRA and why a Roth might be a better choice for the average student.   Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½.  After age 70 1/2, minimum withdrawals become mandatory.

Roth IRAs don’t allow a current tax-deductible contribution; instead they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well.   If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. That’s a good thing in light of expected increases in future tax rates.  For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.  Also, after five years and before you turn age 59 1/2, you may withdraw your original contributions (not any accumulated earnings) without penalty.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time.  Also, some institutions offer cash bonuses for starting an account.  Go with the best deal and start by putting that bonus right into the account.  Watch the fine print for annual fees or commissions and avoid them if possible.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor such as a Certified Financial Planner™ professional.   A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges.  While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships, grants and other smart ideas for borrowing to stay in school.  A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal.  One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.  Better yet, set up an automatic withdrawal from your savings or checking account for the IRA contribution.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives.  Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than spending it at the mall, they might feel considerably better about the money they give away.  At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.  Again, the IRA contributions cannot exceed the student’s earned income for the year.

Sam H. Fawaz is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families. This column was co-authored by Sam H. Fawaz CPA, CFP and the Financial Planning Association, the membership organization for the financial planning community, and is provided by YDream Financial Services, Inc., a local member of FPA.

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